Should I use a mortgage broker, or go direct?

If you’re looking for a mortgage, you might be wondering whether or not you should talk to a mortgage broker or go directly to the lender.

These days, brokers do more than simply churn out a list of available mortgages for a hefty fee, so it could be worth your while to see what they can offer.

Why should I use a mortgage broker?

Legislative changes, most notably in the Mortgage Market Review in 2014, have resulted in a tightening of the rules with regards to mortgage “affordability” checks, the qualifications of all mortgage brokers, and the information brokers must provide to borrowers about their services and their fees.

Since the changes, both lenders and brokers must consider your financial situation and assess your affordability when suggesting suitable mortgages for you. Moreover, they must be able to prove they have done this.

Whilst this legislative revolution has made it harder to obtain a mortgage, it’s also made it far safer to use a mortgage broker.

You can now trust they will undertake a full comprehensive financial assessment and therefore only give you a range of mortgages you will almost certainly be eligible for.

With the huge expense of buying your first home or moving house, it may be tempting to consider the ‘cheaper’ option of applying for a mortgage with your own bank, or by going direct to another lender for your mortgage.

However, avoiding paying broker fees (though there are plenty of reputable fee-free brokers out there) to save a few pennies now could could cost you thousands over the next few years if you opted for a bad mortgage.

Even if you think you do not need the advice of a broker and know enough about the mortgage market without one, you may be missing a trick.

Some brokers have access to a larger range of mortgages (such as via exclusive deals with lenders) and can help speed up the application process by getting you fully prepared and steering you towards mortgages you will most likely be accepted for.

Can I get a mortgage directly from a lender?

If you have done your research and found your perfect mortgage, are confident that you have found the best deal, or you simply want the convenience of asking your current bank for a mortgage, then that’s your prerogative.

Indeed, there can be some merits to going directly to a lender for your mortgage…just be aware of the pitfalls too:

Pros

• Some banks offer preferential mortgage rates if you already have a current or savings account with them.
• Some lenders have exclusive ‘direct only’ deals that a broker would not have access to.
• You avoid paying broker fees.

Cons

• The advice you get from lenders will only refer to their own products rather than an unbiased view of the market as a whole.
• You will not gain access to any broker-only deals, even if they’re offered by your chosen lender.

How do I get a mortgage through a broker?

If you are planning to employ the services of a broker, do your homework first: ask friends and family for a recommendation, check the internet for reviews, and suss out their fee structure.

Ask them outright how many lenders they work with – the more lenders, the more options you have at your disposal and the more likely you could be to get a good deal.

Generally, there are three types of broker:

• Tied brokers: These are usually recommended to you by a particular mortgage lender and only offer deals from that one mortgage provider.
• Multi-tied brokers: These offer a limited range of mortgages from a panel of mortgage lenders.
• Independent brokers: Also known as ‘whole of market brokers’, these investigate the entire mortgage market to find the best product for you. However, “whole of market” does not cover every single deal, as the name suggests.
  This is because some lenders, like First Direct, do not work with brokers and only offer mortgages to borrowers directly.

Since the legislative changes, mortgage brokers have to state from the outset exactly what range of mortgages they can offer. For the most wide-ranging advice and products, it is always advisable to choose an independent broker that offers a ‘whole of market’ service.

Pros

• A broker’s advice will be tailored to your individual financial situation and needs and can therefore advise you on your suitability to all products.
• Can gain access to the whole of the mortgage market, meaning that they have a greater chance of finding that perfect mortgage for you.
• Have access to ‘broker only’ deals
• Do the searching for you and liaise with your chosen lender, which can save you huge amounts of time and stress.
• Expert in their field so could help you find the very latest deals and have in-depth knowledge of the habits and anomalies of different lenders.
  For example, if you are time-strapped, they may be able to tell you which lenders work quickest or if affordability is your main concern, brokers may know which lenders take certain expenditures into consideration during your affordability assessment (including school fees, childcare costs, commuting costs, pension contributions).

Cons

• Mortgage brokering is a business, and brokers may charge a fee for their services. This can be in the form of an hourly rate, a flat fee, a commission-based fee paid by the lender, or a combination of all three.
  Whichever way they charge, brokers are obliged to outline all fees in an initial disclosure document. If your broker is charging a fee and is paid a commission by the lender, it’s worth asking if they will offset some of their commission against the cost of your deal (you never know!)
• You may miss out on direct-only deals which could be cheaper than those offered via a broker. That said, a good broker may include these offers in any market assessment, but you will have to make the application directly.

When deciding on whether or not to use a mortgage broker, a balanced approach may be the best solution.

Do your own research online first, ask your current bank and other direct-only lenders what deals they have available and then speak to a reputable mortgage broker to see what else is available and suitable for your personal circumstances.

That way you’ll get the holistic advice and information you need in order to get the very best mortgage for you.

Edited by: Sarah Guershon

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Last updated: 8 May, 2019

Everything you need to know about reverse mortgages

While most traditional mortgages let borrowers access funds to purchase a home, one type of mortgage works in the exact opposite way. With a reverse mortgage, the homeowner withdraws a portion of the equity available in a home they already own.

The most popular type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the federal government. HECM products are only offered by FHA-approved lenders, although they are widely available.

Reverse mortgages are only available to consumers ages 62 and older. This loan product is aimed at consumers who own their homes outright — or at least have a considerable amount of equity to draw from.

You may be wondering why anyone would want to borrow against a home they worked hard to pay off. Why not remain in your home and live there debt-free?

According to Steve Irwin, executive vice president of the National Reverse Mortgage Lenders Association (NRMLA), nobody gets up in the morning and thinks about getting a reverse mortgage.

“Instead, they think how they are going to pay for healthcare, fix the roof, pay the property taxes or have enough money to outlive their retirement,” he says. “A reverse mortgage provides solutions to these issues and many others, so that people can live more financially secure lives as they age.”

Who is eligible for a reverse mortgage?

If you’re wondering whether a reverse mortgage might work for your situation, it’s important to understand how you can qualify. We already talked about the age requirement, and the fact that you must be age 62 or older to apply. However, Irwin says that if one spouse is under 62, you may still be able to get a reverse mortgage if you meet other eligibility criteria. For example:

• You must own your home outright or have a single primary lean you hope to borrow against.
• Any existing mortgage you have must be paid off using the proceeds from your reverse mortgage.
• You must live in the home as your primary residence.
• You must remain current on property taxes, homeowner’s insurance and other mandatory obligations such as homeowners association dues.
• You must maintain your property and keep it in good working condition.
• Your home must be a single-family home, a multi-unit property with up to four units, a manufactured home built after June 1976, a condominium, or a townhouse. Irwin says co-ops do not qualify.

How does a reverse mortgage work?

Before you sign on the dotted line for a reverse mortgage, it’s crucial to know how they work and what to expect. For starters, keep in mind that you may not be able to borrow the full value of your home — even if it’s paid off. The amount you can withdraw varies based on the age of the youngest borrower or eligible non-borrowing spouse, prevailing interest rates and the lesser of the appraised value of your home, the HECM FHA mortgage limit ($726,525 in 2019), or the sales price.

Not only does the amount you can borrow vary, but so do your options for how to accept your funds. If you choose a HECM with a fixed interest rate, you will receive a single disbursement lump sum payment. If you opt for a reverse mortgage with a variable rate, on the other hand, you can choose to accept:

• Equal monthly payments provided at least one borrower lives in the property as their primary residence
• Equal monthly payments for a fixed period of months agreed on ahead of time
• A line of credit that can be accessed until it is exhausted
• A combination of a line of credit and fixed monthly payments for as long as you live in the home
• A combination of a line of credit plus fixed monthly payments for a set length of time

The money you borrow via a reverse mortgage doesn’t need to be repaid until the borrower dies, moves out, or leaves the home for any reason. Further, the borrower will never owe more than the home is worth regardless of how much they borrow or what happens to their property values over time. And if the balance is less than your home’s value at the time of repayment, you or your heirs keep the difference.

Reverse mortgages — what are the pros and cons?

Borrowing against your home equity to free up cash for living expenses can seem like a good deal once you retire, but there are advantages and disadvantages with this type of loan. Here are the main details to keep in mind:

Pros

• Borrower does not need to make monthly payments toward their loan balance
• Proceeds can be used for living expenses, debt repayment, healthcare expenses, and more
• Funds can help borrowers enjoy their retirement
• Non-borrowing spouses not listed on the mortgage can remain in the home after the borrower dies

Cons

• Borrower must maintain the house and pay property taxes and homeowners insurance
• A reverse mortgage forces you to borrow against the equity in your home, which could be a key source of wealth
• Fees and other closing costs can be high

How much does a reverse mortgage cost?

Speaking of higher costs, it’s important to understand that closing costs for reverse mortgages tend to be significant. Most HECM mortgages let you finance closing costs into the new loan, however, meaning you won’t have to fork over the money out-of-pocket.

Here’s a breakdown of HECM fees and charges, according to HUD:

Mortgage Insurance Premium (MIP). You’ll pay a 2 percent initial MIP at closing, as well as an annual MIP equal to 0.5 percent of the outstanding loan balance. MIP can be financed into the loan.

Origination fee. Lenders charge the greater of $2,500 or 2 percent of the first $200,000 of your home’s value to process your HECM loan, plus 1 percent of the amount over $200,000. The FHA caps HECM origination fees at $6,000.

Servicing fee. Lenders can charge a monthly fee to maintain and monitor your HECM for the life of the loan. Monthly servicing fees cannot exceed $30 for loans with a fixed rate or an annually adjusting rate, or $35 if the interest rate adjusts monthly.

Third-party charges. Third parties charge their own fees for closing costs, such as the appraisal, title search and insurance, inspections, recording fees and mortgage taxes.

Also keep in mind that the interest rate for reverse mortgages tends to be higher than that of a traditional home loan. Of course, rates can vary depending on your lender, your home value, your creditworthiness, and other factors.

Reverse mortgages vs. home equity loans

If you’re not yet 62 or older but still want to tap into your home equity, you may want to consider a home equity loan or home equity line of credit (HELOC) instead. Both loan products will let you borrow against the equity you have in your home, although you can typically only borrow up to 85 percent of your home’s value including your original mortgage if you have one.

However, it’s important to understand the differences you’ll find with a home equity product.

“The main difference between a reverse mortgage, a home equity loan, and a HELOC is that the homeowner doesn’t need to make monthly payments with a reverse mortgage,” said Irwin. Plus, any funds borrowed from the reverse mortgage don’t need to be repaid until the borrower passes away or permanently vacates the property.

With a home equity loan or HELOC, the borrower does have to make monthly payments until the loan is paid off. Home equity loans can also be more difficult — or impossible — for retirees to qualify for since lenders expect you to have an income to repay your loan.

On the flip side, home equity loans and HELOCs don’t require you to be at least 62 years old to apply. Fees and interest rates for both can also be significantly lower than what you’ll qualify find with a reverse mortgage.

The bottom line

Nobody wants to have to borrow money just to get by, but reverse mortgages do serve an important purpose. For the most part, they are intended to help consumers cover living expenses without having to move in old age. For those struggling to pay for healthcare, food or experiences as they enjoy their golden years, a reverse mortgage can be a game-changer.

Then again, they’re not for everyone. A reverse mortgage isn’t a good option if you can’t keep up with the costs associated with the home, even without a monthly mortgage payment.

If you die or the home is no longer the primary residence for more than 12 months, the loan comes due, which means either you or your estate has to repay the loan or put the home up for sale to settle it.

Another potential drawback: if the loan balance exceeds the home’s value, you or your heirs may need to sign a deed-in-lieu of foreclosure and give the house to the lender.

Homeowners interested in taking out a HECM must also receive mandatory counseling with an independent agency approved by the U.S. Department of Housing and Urban Development. Typically, counseling is free or available at a reduced cost.

To locate a FHA-approved lender or HUD-approved counseling agency, you can visit HUD’s online locator or call the department’s Housing Counseling Line at (800) 569-4287.

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